one sphere of life and activity where victory security and success

8/14/2019 One Sphere of Life and Activity Where Victory Security and Success

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COMMENTARY / Q208 | LEGG MASON FUNDS

Legg Mason Value TrustInvestment CommentaryManaged by Legg Mason Capital Management

Bill Miller, CFAChief Investment Officer, Chairman and Portfolio Manager, Legg Mason Capital Management, Inc.

INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE PAGE 1 of 3

Portfolio Manager Commentary

A group of us were standing around a few weeks ago when Warren Buffett wandered over. Chris Davis had dubbed us the

Value Support Group, as we all adhered to that approach to investing. We were commiserating over how badly we had done

in this market, how valuation appeared not to matter and had not for the past couple of years, how it was all aboutmomentum and trend, and how we were all losing clients and assets over and above our losses in the market. It seemed like

we needed a 12-step program to cure us of our addiction to buying beaten-up stocks trading at large discounts to our

assessment of their intrinsic value.

Mason Hawkins said, Warren, Im an optimist. I think this whole thing can turn quickly, and surprise people. Are you an

optimist? Im a realist, Mason, the sage replied. Warren went on to say he was optimistic long term, and backed that up

in a talk the next morning on the remarkable history of growth, innovation, and wealth creation the U.S. had produced over

the past 200-plus years. He also offered a sober assessment of the current challenges we face, and said it would take some

time to work through them.

He then made the perfectly sensible point that as we are all net savers, we should be happy if stock prices declined a lot

more, so we could buy even better bargains. That is a point Charlie Ellis elaborated on in his fine book, Investment Policy, a

few years back. As a matter of logic, it is irrefragable. As a matter of psychology, I think most of us value investors think we

have plenty enough bargains already, and may not be able to handle that many more. Or more accurately, our clients may

not be able to. We are value investors because we are persuaded of the logic of buying shares of businesses when others want

to sell them, and we understand that lower prices today mean higher future rates of return, and high prices today mean lower

future rates of return.

The best time to buy our funds or to open an account with us has always been when weve had dismal performance, and the

worst time has always been after a long run of excess returns. Yet we (and everyone else) get the most inflows and the most

interest AFTER weve done well, and the most redemptions and client terminations AFTER weve done poorly. It will always

be so, because that is the way people behave.

John Rogers, the founder of Ariel Investments, came in to see us last week. John has been an outstanding investor for 25

years or so, but like almost all value types, is going through one of his toughest periods now. His assets are down, similar to

the experience weve had. He said it was the most difficult market hed seen, a judgment I would have given to the 1989-

1990 market, up until the frenzy erupted over Fannie Mae and Freddie Mac, which sent financials to what looks like a

capitulation low on July 15th. I am now in Johns camp.

A point he made that I have likewise noted to our staff is that this is the only market I have seen where you could just read

the headlines in the papers, react to them, and make an excess return. I have used the mantra to our analysts that if its in

the papers, its in the pricewhich used to be correct. Indeed, it borders on clich in the business that by the time something

makes the cover of the major news or business publications, you can make money by doing the opposite. There is solid

academic research to back this up. But in the past two years, you didnt need to know anything except to sell what the

headlines were negative about (anything related to real estate, the consumer, or finance) and buy anything that was going up

and that everybody liked (energy, materials, industrials).

I am reminded of what John Maynard Keynes, himself a great investor, said once about investing, It is the one sphere of life

and activity where victory, security, and success is always to the minority and never to the majority. When you find anyone


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agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am

learning from experience, is when I should sell it.

It has been explained to me that it was obvious we should not have owned homebuilders, or retailers or banks, and that I

should have known better than to invest in such things. It was also obvious that growth in China and India and other

developing countries would drive oil and other commodities to record levels and that related equities were the thing to own.Dont you even read the papers? was a common comment.

While I am quite aware of our mistakes, both of commission and omission, when I ask what is obvious NOW, there is little

consensus. If there is something obvious to do that will earn excess returns, then we certainly want to do it.

Is it obvious financials should be bought now, having reached the most oversold levels since the 1987 Crash, and the lowest

valuations since the last great buying opportunity in 1990 and 1991? Or is it obvious they should be avoided, since the credit

problems are in the papers every day and write-offs and provisioning will likely continue into 2009?

Is it obvious energy stocks should be bought on this correction in oil prices from $147 to $123, a correction that has wiped 25

points off the prices of companies like XTO Energy and Chesapeake Energy in just a few weeks? Or is it obvious that oil had

reached bubble levels at $147, and that buying the stocks here, down 30% from their highs, is akin to buying homebuilders

down 30% from their highs in 2005? If you had bought Tesoro Petroleum or Valero Petroleum when their prices broke late last

fallremember the Golden Age of Refining story that took Tesoro from under $4 to over $60?you would be looking at losses

in this year greater than if you had bought Citibank or Merrill Lynch.

I do think some things are obvious: it is obvious the credit crisis will end, and it is obvious the housing crisis will end, and that

credit markets will function satisfactorily and house prices will stop going down and then start moving higher. It is obvious

that the American consumer will spend sufficiently to keep the economy moving forward long term. It is obvious that the U.S.

economy, already the most productive in the world, will get even more productive and will adapt and grow. It is obvious

stock prices will be higher in the future than they are now.

Sir John Templeton died a few weeks ago, full of riches and honors, as he so deserved to be. The legendary value investor got

his grubstake by famously buying shares of 104 companies selling for $1 a share or less when war began in 1939. He didnt

know then that the war in Europe would spread to engulf the world, nor how long it would last, nor how low prices would

ultimately go. He always said he tried to buy at the point of maximum pessimism, but he never knew when that was. He was,

though, a long-term optimist, as is Mr. Buffett, as am I.

Bill MillerJuly 27, 2008.

Investment Risks

All investments are subject to risk, including possible loss of principal. The value approach to investing involves the risk that

those stocks deemed to be undervalued by the portfolio manager may remain undervalued. Because this Fund expects to hold

a concentrated portfolio of a limited number of securities, a decline in the value of these investments would cause the Funds

overall value to decline to a greater degree than a less concentrated portfolio. The Fund may focus its investments in certain

regions or industries, thereby increasing its potential vulnerability to market volatility.The views expressed in this commentary reflect those of Legg Mason Capital Management, Inc. (LMCM), as of the date of the

commentary. Any views are subject to change at any time based on market or other conditions, and LMCM, Legg Mason ValueTrust, Inc., and Legg Mason Investor Services, LLC (LMIS), disclaim any responsibility to update such views. These views may

differ from those of portfolio managers and investment personnel for LMCMs affiliates and are not intended to be a forecast

of future events, a guarantee of future results or investment advice. Because investment decisions for the Legg Mason Funds

are based on numerous factors, these views may not be relied upon as an indication of trading intent on behalf of any Legg

Mason Fund. The information contained herein has been prepared from sources believed to be reliable, but is not guaranteed

by LMCM, Legg Mason Value Trust or LMIS as to its accuracy or completeness.


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Second Quarter 2008

Total returns for the Fund for various periods ended June 30, 2008 are presented below, along with those of a comparative

index:

Average annual total returns and expense ratio (%) as of June 30, 2008

VALUE TRUST INCEPTIONDATE

1-YEAR 3-YEAR 5-YEAR 10-YEAR SINCEINCEPTION

EXPENSE

PRIMARY CLASS (LMVTX) 4/16/82 -36.41 -8.62 -0.40 2.18 13.29 1.70

FINANCIAL INTERMEDIARYCLASS (LMVFX)

3/23/01 -35.99 -8.01 0.26 - -0.21 1.03

INSTITUTIONAL CLASS(LMNVX)

12/1/94 -35.78 -7.71 0.59 3.19 12.15 0.70

S&P 500 INDEX1 -13.12 4.41 7.58 2.88 12.562

The performance shown r epresents past perform ance. Past performance is no guarantee of futur e results and current performance maybe higher or lower than the performance shown above. Investment return and princi pal value will fluct uate so that an investors shares,when redeemed, may be worth more or less than their orig inal cost. Returns as of the recent month-end may be obtained by visit ing

www.leggmason.com/individualinvestors. Average annual total returns assume the reinvestment of all distri butions at net asset value andthe deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods. Performance andexpenses for other share classes will vary. Not all share classes are available through all distri bution channels. Minimums may varybased on share class. Please contact your fi nancial professional for fur ther information.

*Expenses are the Funds total annual operating expenses for the share class indicated as of the date of the Funds most current prospectus. Theseexpenses include management fees, 12b-1 distribution and service fees, and other expenses. Expenses for other share classes vary.

1A market capitalization-weighted index, composed of 500 widely held common stocks, that is generally considered representative of the U.S. stock market. It is notpossible to invest directly in an index.2Since inception for the benchmark is as of the closest month-end after the Funds Primary class inception date.

Top Ten Holdings as of June 30, 2008

The AES Corp. (9.1%), Amazon.com Inc. (7.3%), Aetna Inc. (5.8%), eBay Inc. (4.8%), Google Inc. (4.3%), JPMorgan Chase and

Co. (4.2%), UnitedHealth Group Inc. (4.2%), General Electric Co. (3.9%), Hewlett-Packard Co. (3.8%), and Citigroup Inc. (3.7%).These holdings do not include the Funds entire investment portfolio and may change at any time.

AN INVESTOR SHOULD CONSIDER A FUNDS INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES CAREFULLY

BEFORE INVESTING. FOR A FREE PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION ON ANY LEGG

MASON FUND, VISITWWW.LEGGMASON.COM/INDIVIDUALINVESTORS. AN INVESTOR SHOULD READ THE PROSPECTUS

CAREFULLY BEFORE INVESTING.

Legg Mason Capital Management, Inc., and Legg Mason Investor Services, LLC, are Legg Mason, Inc. affiliated companies.

2008 Legg Mason Investor Services, LLC distributor, member FINRA, SIPC TN08-3091 (07/08)

one sphere of life and activity where victory security and success

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